B&G Foods, Inc. — Q2 2019 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 29, 2019; filed August 6, 2019. Figures below are in millions of dollars except per-share data. The company manufactures and distributes branded shelf-stable and frozen foods in the U.S., Canada and Puerto Rico.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $371.2 | $388.4 | $783.9 | $820.1 |
| Gross profit / margin | $91.9 / 24.7% | $81.2 / 20.9% | $179.9 / 23.0% | $184.5 / 22.5% |
| Operating income / margin | $47.4 / 12.8% | $39.3 / 10.1% | $92.7 / 11.8% | $95.5 / 11.6% |
| Net income | $18.3 | $8.0 | $35.0 | $28.5 |
| Diluted EPS | $0.28 | $0.12 | $0.53 | $0.43 |
| Adjusted EBITDA (non-GAAP) | $71.0 | $74.4 | $146.8 | $163.9 |
Q2 gross and operating margins improved year over year, while reported sales declined. The company attributed the sales decline mainly to the 2018 Pirate Brands divestiture. Base-business sales fell 0.5% in Q2 and 0.2% in the first half: higher pricing was offset by lower unit volumes and a small foreign-currency impact. Green Giant sales increased, while several other brands, including Back to Nature, declined.
Cash flow, liquidity and debt
- First-half operating cash flow was $16.8 million, down from $104.8 million. The company cited approximately $71.8 million of adverse cash-tax impact related to the Pirate Brands sale, including a $43.2 million tax payment, as well as working-capital comparisons and timing of transition-service receipts. It estimated first-half operating cash flow would have been $88.6 million absent the sale-related tax impact.
- First-half capital expenditures were $18.1 million; investing cash outflow was $100.6 million, including $82.4 million paid net of cash acquired for Clabber Girl. Financing provided $91.9 million, including net revolving borrowings of $165.0 million.
- At June 29, cash was $19.9 million and total debt, net of financing costs and premium, was $1.803 billion; debt less cash was $1.783 billion. Debt included $700 million of 4.625% notes due 2021, $900 million of 5.25% notes due 2025, and $215 million drawn on the revolving facility.
- Revolver availability was $483.4 million, net of letters of credit. The company reported compliance with debt covenants. It stated cash, operating cash flow and available revolver capacity should fund foreseeable needs, including debt service, capital spending, acquisitions and dividends.
- Current assets were $597.4 million, including $404.8 million of inventory; current liabilities were $198.2 million. Operating lease liabilities totaled $45.3 million, following adoption of the lease standard in 2019.
Material changes and notable items
- Clabber Girl was acquired May 15, 2019 for approximately $84.6 million cash. Its preliminary purchase-price allocation included $13.4 million of goodwill and $36.0 million of trademarks and customer-relationship intangibles. It contributed $8.4 million of Q2 sales; allocation remains preliminary.
- Pirate Brands, sold in October 2018 for $420.0 million, contributed $25.2 million of Q2 2018 sales and $46.2 million of first-half 2018 sales, making reported comparisons less direct. McCann’s contributed $2.2 million of Q2 2019 sales.
- Interest expense declined year over year, reflecting lower debt after Pirate Brands sale proceeds were used to repay term debt, partly offset by revolver borrowing for Clabber Girl. No debt-extinguishment loss was recorded in 2019, versus $3.3 million in the first half of 2018.
- A workforce reduction generated $1.9 million of first-half charges; the company expects approximately $0.5 million more charges and estimates annualized savings of $2.4 million. It also recorded $0.7 million of additional share-based compensation after extending post-retirement option exercise periods.
Outlook, risks and contingencies
- No specific full-year revenue or earnings guidance is provided in the filing. Management expects fiscal 2019 capital expenditures of $45–$50 million, including ERP, productivity, IT and infrastructure projects.
- The quarterly dividend was $0.475 per share; management expected approximately $124.3 million of fiscal 2019 dividends at the then-current annual rate of $1.90 per share. First-half dividends paid were $62.2 million, exceeding first-half operating cash flow.
- Management anticipated higher 2019 raw-material and distribution costs, with freight costs expected to remain elevated. Most significant commodity needs, except items including maple syrup, were priced or supplied under arrangements through fiscal 2019. Pricing actions and cost savings may not fully offset inflation, and customer acceptance is uncertain.
- Key risks include substantial leverage, commodity and freight inflation, competition and changing consumer preferences, customer inventory reductions, acquisitions and integration, foreign exchange exposure, food safety and labeling matters, supplier disruptions, cybersecurity and ERP execution. Walmart represented 25.8% of first-half sales and 28.0% of receivables at June 29; the top ten customers represented 55.0% of first-half sales.
- Approximately 61% of employees were covered by collective bargaining agreements; four agreements were scheduled to expire within the following twelve months. Management did not expect negotiations to materially affect results, but production interruptions could not be ruled out. Ordinary-course legal proceedings were not expected to have a material adverse effect. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether base-business volume trends and weaker brands improve, and whether Green Giant’s growth continues.
- Operating cash flow and working-capital performance after the one-time sale-related tax effects; sustainability of the dividend relative to cash generation.
- Debt reduction, interest costs, covenant headroom and upcoming $700 million note maturity in 2021.
- Clabber Girl’s final purchase-price allocation, post-acquisition performance and integration results.
- Delivery of stated cost savings and capital projects, including ERP implementation and inflation mitigation.